Categories
Commentary

Daily Brief For September 17, 2021

Market Commentary

Equity index futures trade sideways to lower.

  • Fed could hint at a stimulus taper.
  • Ahead: UoM consumer sentiment.
  • OPEX and a potential for volatility.

What Happened: U.S. stock index futures auctioned sideways to lower ahead of quadruple witching and news the Federal Reserve may hint at scaling back asset purchases next week. 

Ahead is data on University of Michigan consumer sentiment (10:00 AM ET).

Graphic updated 6:30 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:30 AM ET, Friday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on weak intraday breadth and strong market liquidity metrics, the worst-case outcome occurred, evidenced by trade back toward the market’s most recent perception of value, the convergence of the $4,437.75 micro-composite point of control (MCPOC) and an anchored volume-weighted average price (VWAP).

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.

VWAP: A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.
Graphic: Divergent delta (i.e., committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade or balance (i.e., rotational trade that suggests current prices offer favorable entry and exit).

We’re carrying forward the presence of minimal excess at Wednesday’s regular trade low (RTH Low), after a test of a point of control (POC) and 50-day simple moving average (i.e., two visual levels likely paid attention to by short-term, technically-driven market participants who generally are unable to defend retests).

Balance-Break Scenarios Potentially In Play: A change in the market (i.e., the transition from two-time frame trade, or balance, to one-time frame trade, or trend) may occur.

Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area. Rejection (i.e., return inside of balance) portends a move to the opposite end of the balance.

Further, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, heightened valuations, the prospects of stimulus reduction, as well as non-seasonally aligned flows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition.

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. Based on his analysis, Pat sees that the “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish,” while “OPEX week returns peaked in 2016 and have trended lower since.”

According to SqueezeMetrics, coming into Thursday’s session, the steepness of the GammaVol (GXV) curve suggested there was no more risk to the upside than there was to the downside; “SPX upside needs a bunch of bought puts to throw on the bonfire. It would be bullish for SPX to have people buying SPX puts,” and that hasn’t happened yet.

Thereafter, the index crept back into range, past $4,450.00, before responding higher, into the close ahead of quadruple witching, during which SpotGamma believes participants are likely to “see a big chunk of SPX options expire on the open, and the balance of index/etf/stocks expire on the close. This should lead to a decent amount of volatility Friday and Monday ahead of the FOMC.”

Moreover, for today, given an increased potential for heightened volatility, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,481.75 high volume area (HVNode) puts in play the $4,510.00 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,526.25 HVNode and $4,550.00 overnight high (ONH).

In the worst case, the S&P 500 trades lower; activity below the $4,481.75 HVNode puts in play the $4,437.75 MCPOC. Initiative trade beyond the MCPOC could reach as low as the $4,425.25 minimal excess low and $4,393.75, another micro-composite point of control (MCPOC).

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

Volume Areas: A structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low volume area which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 6:30 AM ET.

News And Analysis

Fed seen announcing bond taper in November, rate liftoff in 2023.

Invesco could merge with a State Street asset-management unit.

Food and Drug Administration weighing COVID-19 booster shots.

S&P analysis on Canada growth prospects in the coming decade.

Rising transportation expenses are companies’ big inflation hurdle

Wall Street influencers are making $500,000, above even bankers.

GM plans to idle factories longer amid problematic chip shortages.

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For September 16, 2021

Market Commentary

Equity index futures trade sideways to lower with commodities and yields.

  • Equity indices falling; SPX above 50-day.
  • Ahead are claims, retail sales, and more.
  • Positioning risks mount case for volatility.

What Happened: After a break higher, yesterday, U.S. stock index futures auctioned sideways to lower overnight as participants positioned themselves for an options expiry and upcoming data dumps.

Ahead is data on jobless claims (8:30 AM ET), retail sales (8:30 AM ET), Philadelphia Fed manufacturing survey (8:30 AM ET), and business inventories (10:00 AM ET).

Graphic updated 6:40 AM ET. Sentiment Neutral if expected /ES open is inside of the prior day’s range. SqueezeMetrics Dark Pool Index (DIX) and Gamma (GEX) calculations are based on where the prior day’s reading falls with respect to the MAX and MIN of all occurrences available. A higher DIX is bullish. At the same time, the lower the GEX, the more (expected) volatility. SHIFT data used for S&P 500 (INDEX: SPX) options activity approximation. Note that options flow is sorted by the call premium spent; if more positive then more was spent on call options. Breadth reflects a reading of the prior day’s NYSE Advance/Decline indicator. VIX reflects a current reading of the CBOE Volatility Index (INDEX: VIX) from 0-100.

What To Expect: As of 6:40 AM ET, Thursday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open inside of prior-range and -value, suggesting a limited potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, on strong intraday breadth and middling market liquidity metrics, the best case outcome occurred, evidenced by the S&P 500 closing the session on a spike higher, away from value.

Spike Rules In Play: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike). 
Graphic: Divergent delta (i.e., non-committed buying as measured by volume delta or buying and selling power as calculated by the difference in volume traded at the bid and offer) in SPDR S&P 500 ETF Trust (NYSE: SPY), one of the largest ETFs that track the S&P 500 index, via Bookmap. The readings are supportive of responsive trade or balance (i.e., rotational trade that suggests current prices offer favorable entry and exit).

This is significant because of rejection, or a willingness not to transact at lower prices. We’re carrying forward the presence of minimal excess at Wednesday’s regular trade low (RTH Low), after a test of a prior untested point of control (VPOC) and 50-day simple moving average (i.e., two visual levels likely paid attention to by short-term, technically-driven market participants who generally are unable to defend retests).

Graphic: S&P 500 rotates between the 20- and 50-day simple moving average. Thus far, stronger sellers have not stepped up.

Further, the aforementioned trade is happening in the context of peak growth and a moderation in the economic recovery, heightened valuations, the prospects of stimulus reduction, as well as non-seasonally aligned inflows, impactful options market dynamics, divergent sentiment, and fears of a mid-cycle transition.

Graphic: @pat_hennessy breaks down returns for the S&P 500, categorized by the week relative to OPEX. Based on his analysis, Pat sees that the “2 weeks prior to OPEX (e.g., 7/30/21 to 8/6/21 in this late-cycle) [have] been extremely bullish,” while “OPEX week returns peaked in 2016 and have trended lower since.”

According to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggests there is no more risk to the upside than there is to the downside; “SPX upside needs a bunch of bought puts to throw on the bonfire. It would be bullish for SPX to have people buying SPX puts,” and that hasn’t happened yet.

In other words, the graphic “means that movement from 4450 to 4500 is very easy, … [a]nd now that we’re at 4480, it’s slippery back down to 4450.”

Moreover, for today, given an increased potential for heightened volatility and responsive trade, participants may make use of the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,481.75 high volume area (HVNode) puts in play the $4,510.00 low volume area (LVNode). Initiative trade beyond the LVNode could reach as high as the $4,526.25 HVNode and $4,550.00 overnight high (ONH).

In the worst case, the S&P 500 trades lower; activity below the $4,481.75 HVNode puts in play the $4,449.50 spike base. Initiative trade beyond the spike base could reach as low as the $4,425.25 minimal excess low and $4,393.75 micro-composite point of control (MCPOC).

To note, the $4,481.75 HVNode corresponds with two anchored Volume Weighted Average Price (VWAP) levels, a metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Overnight Rally Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

Volume Areas: A structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low volume area which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures updated 7:25 AM ET.

News And Analysis

How ‘OpEx’ is shaking up the third week of the month.

U.S. political noise to intensify but have limited impact.

Though COVID cases are falling, the deaths are rising.

Biden’s economic plan at risk of delays amid squabble.

China Evergrande onshore bond trading is suspended.

The Coinbase spat with SEC ups ante in a crypto fight.

The foreclosure rate at its lowest in over two decades.

Talking Options Greeks: Everything you need to know.

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. 

Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Weekly Brief For July 25, 2021

Market Commentary

Key Takeaways: After a short sell-off, volatility ebbs as equity index futures trade higher.

  • Unpacking factors lending to the volatility.
  • Jitters ahead of Federal Reserve meeting.
  • Earnings outlook up. Priced to perfection? 
  • COVID-19 resurgence to not limit mobility.
  • Analyzing tightening and the shift to fiscal.

What Happened: Last week’s violent trade came as inflation measures rose the largest since the Global Financial Crisis.

At and around the same time was a monthly options expiration (OPEX) which opened the window to fundamental dynamics (e.g., a shift in preferences from saving and investing to spending, monetary tightening, seasonality, COVID-19 resurgence) given a “reduction in large options positions, and the hedging associated with them,” according to SpotGamma, an authority in the space.

The subsequent sell-off then moved the market into short-gamma, an environment in which the opposing side of options trades hedge by buying into strength and selling into weakness, thereby exacerbating volatility.

To note, we’re discussing the implications of derivatives since option volumes are comparable to stock volumes and, as a result, related hedging flows can represent an increased share of volume in underlying stocks.

Further, the reversal caught many by surprise. Why? Downside risks were thought to have been compounded by equity, bond, and derivatives market positioning, among other factors.

For instance, some metrics implied froth with respect to the number of put options being sold to open, a potentially destabilizing force given associated hedging forces.

To note, put sales, which can be part of sophisticated volatility-based trading strategies, can imply confidence as market participants look to options for income, and not insurance.

Amidst the selling, though, some indicators suggested participants more so became interested in puts as downside protection.

Then, on July 19, the S&P 500 rebounded as near-term discovery reached a potential limit, based on market liquidity metrics and the inventory positioning of participants.

SpotGamma’s metrics confirmed; participants bought calls and sold puts suggesting confidence in the low.

In explaining the violent reversal and follow-through, it’s useful to point to three factors – the change in the underlying price (gamma), implied volatility (vanna), and time (charm) – known to impact an options exposure to directional risk or delta.

Graphic: SqueezeMetrics details the implications of customer activity in the options market, on an underlying’s order book. 

In short, in selling a put, for instance, customers indirectly add liquidity and stabilize the market. 

How? The market maker long the put will buy (sell) the underlying to neutralize directional risk as price falls (rises).

On the other hand, as the market reverses and continues rising, volatility compresses, and any puts that were bought quickly lose value, thereby lowering the opposing side’s directional risk.

As a result, short hedges are bought back, adding fuel to the price rise.

Considerations: The recession is over and the outlook for earnings is great.

That is reflected by heightened valuations, peak positioning, and S&P 500 price targets.

Also, in spite of extreme fear in the face of a COVID-19 resurgence, red states, where the risks of transmission are greater given lower vaccination rates, will likely not limit mobility while blue states are more so highly vaccinated and will remain mobile, according to Bloomberg

That brings us to the topic of monetary policy. 

The U.S. is in a different place from the rest of the world and is likely to eliminate its output gap this year which would call for a tightening in policy and dollar strengthening, helping douse inflation.

Graphic: Implications of high single-digit inflation on S&P 500 returns via Bloomberg.

On that note, Moody’s strategists comment: “The impressive growth in value across many asset classes is projected to taper off within the next couple of years as supportive policy is unwound. The 10-year Treasury yield will rise above 2% by 2022 and the fiscal tailwinds will also have faded by then.”

When liquidity is removed, as policymakers look to fiscal policy to address inequality, for instance, corporations may have to worry about making money, again. 

“That’s ultimately how we grow out of these valuations,” Kai Volatility’s Cem Karsan explained to me in an article Benzinga will release next week. “These cycles are a lot shorter than the monetary supply-side cycles but they tend to be very bad for multiples and great for economic growth.”

What To Expect: Ahead of the upcoming Federal Reserve meeting, participants will want to temper their expectations on future volatility and focus their attention on where the S&P 500 trades in relation to the $4,384.50 low volume area (LVNode) pivot, a prior all-time high (ATH).

In the best case, the S&P 500 trades sideways or higher; activity above the $4,384.50 LVNode puts in play the $4,407.75 ATH. Initiative trade beyond the ATH could reach as high as the $4,428.25 and $4,470.75 Fibonacci-derived price extensions.

In the worst case, the S&P 500 trades lower; activity below the $4,384.50 LVNode puts in play the $4,357.75 LVNode. Initiative trade beyond the $4,357.75 LVNode could reach as low as the $4,341.75 micro-composite Point of Control (MCPOC) and $4,325.75 LVNode.

Note also that the last key level corresponds with two key Volume Weighted Average Price (VWAP) levels, a metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

Volume Areas: A structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low volume area which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.

Significance Of Prior ATHs, ATLs: Prices often encounter resistance (support) at prior highs (lows) due to the supply (demand) of old business. These areas take time to resolve. Breaking and establishing value (i.e., trading more than 30-minutes beyond this level) portends continuation.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were committing the most capital to call strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 (INDEX: NDX), last week. Note, flow in the S&P 500 may denote the trade of box spreads.

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For July 21, 2021

Market Commentary

Equity index futures sideways to higher overnight. 

  • Pandemic continues to accelerate.
  • Ahead is oil market data, earnings.
  • Indices sideways as volatility ebbs.

What Happened: U.S. stock index futures auctioned sideways to higher alongside an increased spread of COVID-19 variants, earnings, and tremendous bond market volatility.

The trade comes also as leading indicators for global economic growth show unusually strong readings, according to Merrill, “pointing to one of the strongest economic expansions of the past 70 years.” In line, strategists at JPMorgan Chase & Co (NYSE: JPM) revised higher their year-end S&P 500 price target from $4,400 to $4,600. 

Ahead, participants are looking forward to data on oil market inventory and earnings.

Graphic updated 6:30 AM ET. Sentiment Risk-On if expected /ES open is above the prior day’s range. A positive Dark Pool Index reading is bullish. At the same time, the higher (lower) the gamma, the less (more) volatility. SHIFT Search data used for options activity. Note that options flow is sorted by the call premium spent; if green and more (less) positive then more (less) was spent on call options. Breadth reflects a reading of the prior day’s Advance/Decline indicator.

What To Expect: As of 6:30 AM ET, Wednesday’s regular session (9:30 AM – 4:00 PM EST) in the S&P 500 will likely open on a small gap, just outside of prior-range and -value, suggesting a potential for directional opportunity.

Balance-Break and/or Gap Scenarios: Monitor for acceptance (i.e., more than 1-hour of trade) outside of the balance area.

Gaps ought to fill quickly. Should they not, that’s a signal of strength; do not fade. Leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator.

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction; in such a case, do not follow the direction of the most recent initiative activity.

Adding, during the prior day’s regular trade, the best case outcome occurred, evidenced by trade above the $4,285.25 micro-composite Point of Control (MCPOC). This is significant because it denotes movement above the fairest price to do business since the June 20 swing low. Now, initiative sellers have a clear line in the sand – $4,285.25 – when it comes to making headway into areas of demand.

Further, the near-vertical price rise wasn’t without a warrant.

After breaking down, the S&P 500 came to a micro-composite LVNode and halted. Thereafter, prices rebounded. Why was this? Stock indexes were positioned for a vicious rebound as near-term downside discovery may have reached a limit, based on market liquidity metrics and the inventory positioning of participants. 

According to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggested there was more risk to the upside than the downside, at that S&P 500 juncture.

Given this metric, strong breadth, and positive delta, as well as the resolve of a Volume Weighted Average Price (VWAP) pinch, the S&P 500 is positioned for higher.

Graphic: SPDR S&P 500 ETF Trust (NYSE: SPY) market liquidity, via Bookmap. Note the supportive volume delta, a measure of buying and selling power as calculated by the difference in volume traded at the bid and offer.
Volume-Weighted Average Prices (VWAPs): A metric highly regarded by chief investment officers, among other participants, for quality of trade. Additionally, liquidity algorithms are benchmarked and programmed to buy and sell around VWAPs.

For today, participants can trade from the following frameworks.

In the best case, the S&P 500 trades sideways or higher; activity above the $4,334.25 spike base puts in play the $4,343.00 untested Point of Control (VPOC). Initiative trade beyond the VPOC could reach as high as the $4,357.75 low volume area (LVNode) and $4,371.00 VPOC.

In the worst case, the S&P 500 trades lower; activity below the $4,334.25 spike base puts in play the $4,314.75 HVNode. Initiative trade beyond the $4,314.75 HVNode could reach as low as the $4,299.75 HVNode and $4,285.25 micro-composite POC.

Spikes: Spike’s mark the beginning of a break from value. Spikes higher (lower) are validated by trade at or above (below) the spike base (i.e., the origin of the spike).

POCs: POCs are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.

Volume Areas: A structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low volume area which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.
Graphic: 65-minute profile chart of the Micro E-mini S&P 500 Futures.

News And Analysis

Work-in-progress U.S. infrastructure bill faces test in Senate. (REU)

Housing starts continuing to improve as permits lose ground. (MND)

Nasdaq to spin out market for pre-IPO shares in a bank deal. (WSJ)

Decentralized finance builds on three major waves of bitcoin. (Future)

Startups on a record acquisition spree buying other startups. (CBN)

U.S. and European consumer confidence and spending rise. (Moody’s)

Titan – Fidelity for Millennials – raised $58M Series B round. (CBN)

Survey showing U.S. majority supports more tech regulation. (Axios)

What People Are Saying

About

After years of self-education, strategy development, and trial-and-error, Renato Leonard Capelj began trading full-time and founded Physik Invest to detail his methods, research, and performance in the markets. Additionally, Capelj is a finance and technology reporter. Some of his biggest works include interviews with leaders such as John Chambers, founder and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Weekly Brief For May 16, 2021

Market Commentary

Key Takeaways: Index futures are back in balance.

  • Economic data failing to surprise.
  • JPM: “Market is a little oversold.”
  • Indices reject lower prices, rotate.

What Happened: Last week, U.S. stock index futures auctioned lower alongside the release of uninspiring economic data.

In particular, the S&P 500 advertised prices below a key consolidation area but failed to solicit aggressive selling. Thereafter, participants rotated the index back inside the aforementioned consolidation, suggesting they were seeking more information to base a directional move. 

As stated in the last few weekly commentaries, participants have a lot to account for in positioning themselves during one of the weakest stretches of the year. Among their worries are inflation expectations – in part due to “choke points in global supply chains” – and stalling retail sales, as well as consumer price and job data misses. At the same time, sentiment and positioning metrics are waning while inflows remain strong, across the globe, and many year-end index targets remain clustered at and above current prices.

Of all the factors mentioned, inflation is a key concern. Why? Generally speaking, inflation and rates move inverse to each other. Low rates stimulate demand for loans (i.e., borrowing money more attractive). With the rapid recovery, though, market participants are fearful that rates may have to rise to protect the economy from overheating.

Higher rates have the potential to reduce the present value of future earnings, making stocks, especially those that are high growth, less attractive. To note, however, rates remain rangebound; rates on the 10 Year T-Note sit below their March high and are likely to continue higher, which, according to research by JPMorgan Chase & Co (NYSE: JPM), the market will likely absorb.

In fact, JPMorgan’s Marko Kolanovic, in a CNBC appearance, said that the market is a little oversold, and his S&P 500 target of $4,400.00 remains in play.

“I think market is now actually getting cheap, in some sense,” Kolanovic said. “I think we’re at the end of this upset. I think the market is going to go higher here. That said, we do still again prefer reflationary themes.”

Looking back, also, according to The Market Ear, even during the so-called Taper Tantrum, in the early 2010s, rates settled in a wide range, and equities rallied big. 

Graphic: Nasdaq 100 rallies in 2013 after rates settle in a wide range, via The Market Ear.

To add, technically speaking, after testing into a composite low volume area (LVNode), the S&P 500 rejected lower prices and quickly traded back to the valuable $4,177.25 high volume area (HVNode).

Volume Areas: A structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.

This volatility was expected; coming into the May 13 reversal, stock indexes were positioning for a vicious rebound as near-term downside discovery reached a potential limit, based on market liquidity metrics and the inventory positioning of participants. According to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggested there was more risk to the upside than the downside.

More On Gamma: In the simplest way, gamma is the sensitivity of an option to changes in the underlying price. Dealers that take the other side of options trades to hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

What To Expect: In the coming sessions, participants will want to focus their attention on where the S&P 500 trades in relation to the $4,177.25 HVNode pivot.

That said, participants can trade from the following frameworks.

In the best case, the index trades sideways or higher; activity above the $4,177.25 HVNode may reach as high as the $4,227.00 POC. Initiative trade beyond the POC could reach as high as $4,238.00 overnight high (ONH) and $4,294.75 Fibonacci price extension, a typical recovery target.

POCs: POCs (like HVNodes described above) are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.

Overnight Highs (Lows): Typically, there is a low historical probability associated with overnight rally-highs (lows) ending the upside (downside) discovery process.

In the worst case, the index trades lower; activity below the $4,177.25 HVNode has the potential to reach the $4,136.25 HVNode. Beyond that level, of interest is the $4,122.25 HVNode, the $4,104.75 LVNode, and the $4,069.25 HVNode. 

Trading below the $4,029.25 overnight low (ONL) suggests a continuation of the bear trend. Caution longs.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Weekly candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: SHIFT search suggests participants were most interested in put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX) and Nasdaq 100 Index (INDEX: NDX), last week. It appears that participants were positioning themselves in strikes across further-dated expiries (e.g., June 18, 2021) suggesting more commitment.

News And Analysis

Markets | Rates remain resilient after the recent inflation scare. (MND)

Markets | Caught-short strategists are a stealth market accelerant. (BBG)

Ratings | Out-of-court restructurings may lead to repeat defaults. (S&P)

Energy | Oil, and gas benefiting from rising crude, value rotation. (BBG)

Energy | Colonial Pipeline resumes normal operations after hack. (Axios)

Markets | Selected indicators – global automotive manufacturing. (REU)

Ratings | Risk of supply chain financing, partial asset sell-downs. (S&P)

Economy | U.K.’s worse recession to turn into a stronger recovery. (S&P)

Economy | Don’t you dare say stagflation; safeguards are slipping. (BBG)

What People Are Saying

Innovation And Emerging Trends

Working | Reimagining the workplace – adapting to new normals. (S&P)

Banking | US banks could cut nearly 200K jobs over the next decade. (FT)

Space | China has made history with its successful Mars landing. (Axios)

FinTech | Cryptocurrency, and blockchain must lead in sustainability. (TC)

Energy | California Governor proposes a $3.2B EV investment plan. (TC)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing leaders such as John Chambers, founder, and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.

Categories
Commentary

Daily Brief For May 13, 2021

Market Commentary

Index futures in price discovery.

  • Inflation contagion hits pocketbook.
  • Ahead: Claims, PPI, and earnings.
  • Index futures are lower but steady.

What Happened: U.S. stock index futures continued their sell-off, overnight, after a strong move lower, Wednesday.

Graphic updated 7:00 AM EST.

What To Expect: Thursday’s regular session (9:30 AM – 4:00 PM EST), in the S&P 500, will likely open just outside of prior -range and -value, suggesting the potential for immediate directional opportunity.

Adding, during the prior day’s regular trade, the worst-case outcome occurred, evidenced by initiative trade below Tuesday’s excess low. This is significant because that reference marked the start of a prior intermediate-term bounce.

Excess: A proper end to price discovery; the market travels too far while advertising prices. Responsive, other-timeframe (OTF) participants aggressively enter the market, leaving tails or gaps which denote unfair prices.

This downside price discovery comes alongside the release of poor employment and payroll data. 

Price Discovery (One-Timeframe Or Trend): Elongation and range expansion denotes a market seeking new prices to establish value, or acceptance (i.e., more than 30-minutes of trade at a particular price level). 

“‘Markets have lost a little bit of confidence that the Fed has control of inflation’ and the concern was that the central bank might wait too long to address the rise,” Victoria Fernandez, Crossmark Global Investments chief market strategist, said. “I am not sure the market is extremely comfortable with that at this point.”

However, that said, stock indexes may be positioned for a vicious rebound as near-term downside discovery may have reached a limit, based on market liquidity metrics and the inventory positioning of participants. According to SqueezeMetrics, the steepness of the GammaVol (GXV) curve suggests that there’s more risk to the upside than the downside, at the S&P 500’s present juncture.

More On Gamma: In the simplest way, gamma is the sensitivity of an option to changes in underlying price. Dealers that take the other side of option trades hedge their exposure to risk by buying and selling the underlying. When dealers are short-gamma, they hedge by buying into strength and selling into weakness. When dealers are long-gamma, they hedge by selling into strength and buying into weakness. The former exacerbates volatility. The latter calms volatility.

Knowing the above, for today, participants can trade from the following frameworks. 

In the best case, the S&P 500 trades sideways or higher; activity above the $4,051.00 regular trade low targets the $4,069.25 high volume area (HVNode). Initiative trade beyond the HVNode could reach as high as $4,082.75 HVNode, $4,105.75 low volume area (LVNode), and then the $4,117.00 POC. 

Volume Areas: A structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low-volume area which denotes directional conviction and ought to offer support on any test). 

If participants were to auction and find acceptance into areas of prior low-volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.

POCs: POCs (like HVNodes described above) are valuable as they denote areas where two-sided trade was most prevalent. Participants will respond to future tests of value as they offer favorable entry and exit.

In the worst case, the S&P 500 trades lower; activity below $4,051.00 puts the index within a composite low-volume zone, a situation in which follow-through, to the next high-volume area, is likely. Further, participants, in such a case, should look for responses at the $4,015.00 and $4,001.00 POCs, the $3,980.00 50% Fibonacci retracement, the $3,943.00 HVNode, and lastly, the $3,918.25-$3,908.00 Fibonacci and volume area confluence zone.

Graphic: 4-hour profile chart of the Micro E-mini S&P 500 Futures.
Graphic: Daily candlestick charts of the S&P 500 (top left), Nasdaq 100 (top right), Russell 2000 (bottom left), and Dow Jones Industrial Average (bottom right).
Graphic: Physik Invest maps out the purchase of call and put options in the SPDR S&P 500 ETF Trust (NYSE: SPY), for May 12. Activity in the options market was primarily concentrated in short-dated tenors, in put strikes as low as $389.00, which corresponds with ~$4,000.00 in the cash-settled S&P 500 Index (INDEX: SPX).
Graphic: SHIFT search suggests participants were most interested in short-dated put strikes at and below current prices in the cash-settled S&P 500 Index (INDEX: SPX), Wednesday. 
Graphic: SHIFT search suggests participants were most interested in long-dated call strikes at and above current prices in the cash-settled Nasdaq 100 Index (INDEX: NDX), Wednesday.

News And Analysis

Crypto | Musk splits from Cathie Wood’s Ark on Bitcoin’s environment cost. (BBG)

Economy | Travel bookings are surging as vaccines unleash pent-up demand. (Axios)

Markets | The SPAC King doing just fine even as the bubble starts to burst. (BBG)

Energy | Top U.S. pipeline recovering from a devastating ransomware attack. (REU)

Markets | Hedging gets frantic as puts soar amid stock market hammering. (BBG)

Economy | April’s inflation surge wasn’t as drastic as it looked. Real test ahead. (CNBC)

What People Are Saying

Innovation And Emerging Trends

MedTech | Unpacking how mRNA molecule became a vaccine game-changer. (FT)

Energy | Nuclear reactions are increasing in an inaccessible Chernobyl chamber. (CNET)

Climate | The Fed privately presses big banks on risks from climate change. (REU)

Economy | China bets on productivity, over population, to drive its economy. (BBG)

Crypto | Fintech giant Ant Group’s MYbank joins China’s digital yuan platform. (SCMP)

About

Renato founded Physik Invest after going through years of self-education, strategy development, and trial-and-error. His work reporting in the finance and technology space, interviewing leaders such as John Chambers, founder, and CEO, JC2 Ventures, Kevin O’Leary, businessman and Shark Tank host, Catherine Wood, CEO and CIO, ARK Invest, among others, afforded him the perspective and know-how very few come by.

Having worked in engineering and majored in economics, Renato is very detailed and analytical. His approach to the markets isn’t built on hope or guessing. Instead, he leverages the unique dynamics of time and volatility to efficiently act on opportunity.

Disclaimer

At this time, Physik Invest does not manage outside capital and is not licensed. In no way should the materials herein be construed as advice. Derivatives carry a substantial risk of loss. All content is for informational purposes only.